Gold Price Factors

When S&P downgraded the rating on US treasury bonds recently, investors sought two safe havens from the perceived risk resulting from the downgrade. Ironically, the first safe haven was treausuries themselves and the second was gold. Of both asset classes, gold gained the most, rallying for the 7th straight week to 1880 dollars per ounce.

Which of the factors discussed on our song Gold Price Factors is driving the price this time, you might be asking yourself.

1. Flight to safety is the greatest driver of gold prices lately.

The fear of a double dip recession combined with the S&P downgrade and european bank/sovereign debt issues has driven investors into the perceived safety of gold.

“Flights to safety increasing the net worth
Of precious metals we’re mining from the earth
Its store of value calms investors fears
From sudden panics that bring our brokers tears”

2. Easy monetary policy

To help stop the downward spiral of equity prices last week, Bernanke promised to keep the overnight interest rate at roughly 0% until the middle of 2013. This could have contributed as well to the rise in gold prices.

“Watch Ben Bernanke and soon you’ll understand
How easy money gives gold greater demand
Commodity prices trend in the inverse
Of fiat values supply becomes a curse”

When I spoke to David Rosenberg about the global economy last month, he noted that gold has been trading more and more like a currency and less like a commodity. Gold is rising on the fear the central banks are destroying the credibility of fiat currencies with excessively low interest rates and quantitative easing thus making gold a better store of value than dollars.